The legal team behind Polygon Labs is proposing a new regulatory framework that calls for neutral and decentralized finance (DeFi) protocols to be designated as “critical infrastructure” and overseen by federal cybersecurity agencies in the United States. The team, consisting of Rebecca Rettig, Katja Gilman, and Michael Mosier, has published a 45-page paper titled “A Conceptual Framework for Combating Illicit Finance Activity in Decentralized Finance” that outlines this proposal.
According to the paper, truly decentralized DeFi protocols should be considered critical infrastructure and be under the oversight of the U.S. Treasury’s Office of Cybersecurity and Critical Infrastructure Protection (OCCIP). While the OCCIP is not an official financial regulator, it coordinates efforts to enhance the security and resilience of the financial services sector’s critical infrastructure and reduce operational risk. The paper emphasizes the importance of distinguishing between truly decentralized DeFi protocols and those with significant centralization, as the latter should be subject to existing financial regulations.
Additionally, the paper suggests the creation of a new category called “critical communications transmitters” that play a crucial role in genuine DeFi systems. These entities would have specific obligations to protect U.S. national and economic security without being classified as “financial institutions” under the Bank Secrecy Act.
The proposed framework also recognizes centralized finance (TradFi) as a separate category with independent control based on guidance from the U.S. Treasury’s Financial Crimes Enforcement Network.
Crypto industry lawyer Jake Chervinsky commented that policymakers in Washington, D.C. are more concerned about illicit finance than securities and commodities laws when it comes to the digital asset industry. He sees this proposed framework as a potential solution to address these concerns.
The authors of the paper stress the importance of empowering legitimate activities while combatting illicit finance. They believe that this approach aligns with the Treasury’s mandate of promoting economic prosperity and ensuring the financial security of the United States.
In summary, the legal team behind Polygon Labs is proposing a new regulatory framework that designates decentralized DeFi protocols as critical infrastructure and suggests oversight by federal cybersecurity agencies in the United States.